March 6, 2017
What business leaders need to know about SBA valuations
The Small Business Act of 1953 created the Small Business Administration (SBA) whose goal was to protect and promote the interests of small businesses. Through this administration, small businesses that would typically be denied a traditional loan from a banking institution due to lack of credit history and other factors gain access to an “SBA loan” if certain requirements are met. Although the SBA does not provide loans directly, it acts as a guarantor to the bank and is obligated to pay a certain dollar amount to the bank if the loan fails. With this government guarantee, small businesses gain access to much needed capital and banks are not exposed to the incremental credit risk related to certain small businesses. SBA loans are frequently used in the buyout, acquisition, or refinance of a business.
Why do I need a valuation?
The Standard Operating Procedures (SOPs) created by the SBA commonly require a bank to contract a third party to perform an independent valuation of the company seeking the loan or against which the leverage is being applied. This aids in the underwriting process to be able to participate with the SBA in a loan. In this manner the Fair Market Value (FMV) of the business establishes that the loan-to-value is appropriate and that the borrower can service the loan. This valuation from an independent source provides an added layer of security for the banking institution, after their due diligence with the borrower, giving them more confidence to extend the credit. Without this valuation, the SBA will not participate as a guarantor on the loan.
The valuation report is sent to the lender, not the borrower, and the party performing the valuation must be paid directly by the bank rather than the one receiving the loan, to ensure independence. The eventual burden of the cost can (and often is) passed on from the lender to the borrower in the closing costs.
How do I choose a valuation firm?
Banks frequently have pre-approved valuation firms with which they work. They often have multiple approved providers and will bid out the work in an effort to ensure the valuation is completed by a firm that has experience in the needed area, can conduct the valuation in a timely fashion, and will perform the valuation at a reasonable rate. Approved providers must have certain credentials from certifying organizations like ASA, AICPA, NACVA, etc.
Any firm performing an SBA loan valuation must be familiar with the SOPs set forth by the SBA. A complete list of these procedures is too large in scope for this purpose of this text, but a full list can be obtained through the SBA website.
For more information regarding the policies and regulations surrounding SBA loans, visit the agency’s website at: www.sba.gov